HSAs becoming more popular

As the presidential campaign kicks into a higher gear, the candidates are finally starting to talk about some substantive issues. Taxes, of course, are getting a lot of attention. So too, is our current health care system.

John McCain and Barack Obama agree that a key to improving the state of U.S. medical coverage is reining in escalating costs. But they disagree on just how to do that, with the major difference being just how much government involvement there should be in America's health care system.

For those of us not on Medicare, Uncle Sam's presence in our medical lives is most often felt in connection with taxes.

Many medical costs are deductible -- as long as you itemize and you have paid enough (7.5 percent of your adjusted gross income).

There also are medical flexible spending accounts, company-offered savings plans in which you set aside pre-tax dollars to pay for deductibles or treatments that aren't covered by your employer-provided health insurance.

But one of the fastest growing tax-related medical options is a health savings account, or HSA.

HSAs are tax-free savings vehicles that became available in January 2004. Anyone younger than 65 can open an HSA as long as they also buy a qualified high-deductible medical policy.

Essentially, you get tax breaks for opting to carry insurance that requires you to pay more of your medical costs. You pay those added out-of-pocket expenses from your tax-favored HSA.

The tax breaks appear in several ways. The first is a deduction on your tax return for the amount contributed each year to your HSA. The amount varies, depending on your coverage, family size and annual adjustments. Even better, you can take an HSA deduction as an above-the-line adjustment, meaning you don't have to itemize to claim it.

Then there are the tax savings on the HSA itself. The account is like an IRA, but specifically for medical expenses. So any money your HSA earns is federally tax-exempt, as long as it's used to pay for eligible medical expenses.

HSAs more appealing: If you have traditional health care coverage at work, you probably won't be able to open an HSA because most mid-sized and large companies don't offer high-deductible policies to their workers. But many small companies and self-employed individuals find the high-deductible plan/HSA combination very attractive.

The most recent IRS data shows that HSAs are replacing other tax-preferred options for health care spending, according to an analysis by the National Tax Office of Grant Thornton LLP, a global accounting, tax and business advisory firm.

The HSA deduction cost the government $869 million in 2006, up from $511 million in 2004. At the same time, deductions for employee-offered flexible medical savings accounts dropped from $67 million to $35 million.

Not to dismiss Grant Thornton's findings -- the IRS numbers are what they are -- but is the HSA growth a sign of changing employment and health care options or a statement on how well health savings accounts meet individual medical needs? Probably a bit of both.

While the Democratic and Republican candidates duke it out over taxes and health care, it might be worthwhile for you and I to examine all our medical insurance options.

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